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VF Corp (VFC; Baa3 Neg/BBB- Neg) Moody's stays put after Supreme sale

CONSUMER CYCLICALS
  • Assuming all $1.5b from Supreme sale will be used for deleveraging (safe assumption given co's guidance) Moody's sees its adj. leverage moving from 5.9x to 5.4x. We pegged pro-forma NET leverage at 4.5x on current FY24 EBITDA consensus of $850m last week - it's equivalent in gross terms to what Moody's has said (5.5x vs. Moody's 5.4x). We referenced net given co's focus on gross paydowns using cash.
  • It says Supreme contributed $538m of revenue and $116m of EBIT in FY24. This may not seem like much for a $10b in sales co but on the bottom line it was a strong contributor; FY24 group EBIT was a -$34m & FY23 was $327m, both dragged on by its core brands that are struggling to make money.
  • The rating agencies continue to show extreme patience with VF; rating downgrade thresholds of 4x yet pro-forma Supreme leverage would be 1.4x turns above that...rating also downgrade-able on "operating performance failing to improve"...it's had 7 straight quarters of falling sales.
  • Again though spreads look attractive for ratings please exercise caution ahead of key event risk in on 6th of August (1Q results). It has not guided for a significant turnaround then and we have not seen a recovery in lead indicators like US card data or google search trends.
  • € lines are ~20bps tighter since the sale was announced last week.
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